UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)

þ		QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended June 30, 2007

o		TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from                      to                     .

CITIZENS & NORTHERN CORPORATION

(Exact name of Registrant as specified in its charter)

PENNSYLVANIA		23-2451943
(State or other jurisdiction of		(I.R.S. Employer
incorporation or organization)		Identification No.)

90-92 MAIN STREET, WELLSBORO, PA 16901
(Address of principal executive offices) (Zip code)

570-724-3411
(Registrant’s telephone number including area code)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes þ No o

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act. (Check one):

Large accelerated filer o            Accelerated filer þ            Non-accelerated filer o

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
Yes o No þ

Indicate the number of shares outstanding of each of the registrant’s classes of common stock, as of the latest practicable date.

Common Stock ($1.00 par value)

8,896,174 Shares Outstanding on August 6, 2007

 

 

CITIZENS & NORTHERN CORPORATION — FORM 10-Q

Index
Part I. Financial Information
Item 1. Financial Statements
Consolidated Balance Sheet — June 30, 2007 and December 31, 2006		Page 3
Consolidated Statement of Income — Three Months and Six Months Ended June 30, 2007 and 2006		Page 4
Consolidated Statement of Cash Flows — Six Months Ended June 30, 2007 and 2006		Pages 5 through 6
Notes to Consolidated Financial Statements		Pages 7 through 13
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations		Pages 14 through 30
Item 3. Quantitative and Qualitative Disclosures About Market Risk		Pages 30 through 32
Item 4. Controls and Procedures		Page 32
Part II. Other Information		Pages 33 through 35
Signatures		Page 36
Exhibit 31.1. Rule 13a-14(a)/15d-14(a) Certification — Chief Executive Officer		Page 37
Exhibit 31.2. Rule 13a-14(a)/15d-14(a) Certification — Chief Financial Officer		Page 38
Exhibit 32. Section 1350 Certifications		Page 39
EX-31.1
EX-31.2
EX-32

CITIZENS & NORTHERN CORPORATION — FORM 10-Q

PART I – FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

Consolidated Balance Sheet

(In Thousands Except Share Data)

		June 30,				December 31,
		2007				2006
		(Unaudited)				(Note)
ASSETS
Cash and due from banks:
Non-interest-bearing		$	20,959			$	18,676
Interest-bearing			21,855				8,483
Total cash and cash equivalents			42,814				27,159
Trading securities			2,514				—
Available-for-sale securities			344,283				356,665
Held-to-maturity securities			412				414
Loans, net			747,114				679,300
Bank-owned life insurance			21,140				16,388
Accrued interest receivable			5,028				5,046
Bank premises and equipment, net			28,531				23,129
Foreclosed assets held for sale			215				264
Intangible asset — Core deposit intangibles			1,691				336
Intangible asset – Goodwill			12,067				2,809
Other assets			19,174				15,858
TOTAL ASSETS		$	1,224,983			$	1,127,368
LIABILITIES
Deposits:
Non-interest-bearing		$	120,832			$	105,675
Interest-bearing			750,309				654,674
Total deposits			871,141				760,349
Dividends payable			2,138				1,969
Short-term borrowings			35,004				49,258
Long-term borrowings			167,704				179,182
Accrued interest and other liabilities			7,503				6,722
TOTAL LIABILITIES			1,083,490				997,480
STOCKHOLDERS’ EQUITY
Common stock, par value $1.00 per share; authorized 20,000,000 shares in 2007 and 2006; issued 9,193,192 in 2007 and 8,472,382 in 2006			9,193				8,472
Stock dividend distributable			—				1,806
Paid-in capital			42,501				27,077
Retained earnings			96,344				96,077
Total			148,038				133,432
Accumulated other comprehensive (loss) income			(1,804	)			613
Unamortized stock compensation			(106	)			(11	)
Treasury stock, at cost:
284,518 shares at June 30, 2007			(4,635	)
262,598 shares at December 31, 2006							(4,146	)
TOTAL STOCKHOLDERS’ EQUITY			141,493				129,888
TOTAL LIABILITIES & STOCKHOLDERS’ EQUITY		$	1,224,983			$	1,127,368

The accompanying notes are an integral part of these consolidated financial statements.
Note: The balance sheet at December 31, 2006 has been derived from the audited financial statements at that date but does not include all the information and notes required by U.S. generally accepted accounting principles for complete financial statements.

CITIZENS & NORTHERN CORPORATION — FORM 10-Q

CONSOLIDATED STATEMENT OF INCOME

		3 Months Ended
		June 30,				June 30,				6 Months Ended June 30,
		2007				2006				2007				2006
		(Current)				(Prior Year)				(Current)				(Prior Year)
INTEREST INCOME
Interest and fees on loans		$	12,679			$	10,695			$	23,960			$	20,861
Interest on loans to political subdivisions			359				335				703				646
Interest on balances with depository institutions			32				23				58				35
Interest on federal funds sold			49				53				150				96
Interest on trading securities			16				—				19				—
Income from available-for-sale and held-to-maturity securities:
Taxable			3,643				3,550				7,140				7,277
Tax-exempt			700				1,046				1,427				2,382
Dividends			214				282				478				550
Total interest and dividend income			17,692				15,984				33,935				31,847
INTEREST EXPENSE
Interest on deposits			6,453				5,298				12,343				10,307
Interest on short-term borrowings			490				623				965				1,049
Interest on long-term borrowings			1,736				1,645				3,371				3,488
Total interest expense			8,679				7,566				16,679				14,844
Interest margin			9,013				8,418				17,256				17,003
(Credit) provision for loan losses			—				(300	)			229				300
Interest margin after (credit) provision for loan losses			9,013				8,718				17,027				16,703
OTHER INCOME
Trust and financial management revenue			939				547				1,621				1,058
Service charges on deposit accounts			633				513				1,115				963
Service charges and fees			182				109				324				174
Insurance commissions, fees and premiums			144				121				260				260
Increase in cash surrender value of life insurance			174				153				319				300
Other operating income			572				494				1,093				971
Total other income before net (losses) gains on available-for-sale securities			2,644				1,937				4,732				3,726
Net (losses) gains on available-for-sale securities			(1,172	)			1,333				(11	)			2,648
Total other income			1,472				3,270				4,721				6,374
OTHER EXPENSES
Salaries and wages			3,433				3,364				7,028				6,686
Pensions and other employee benefits			973				1,005				2,158				2,148
Occupancy expense, net			660				594				1,286				1,140
Furniture and equipment expense			751				668				1,396				1,318
Pennsylvania shares tax			235				244				471				488
Other operating expense			2,137				2,101				4,097				4,039
Total other expenses			8,189				7,976				16,436				15,819
Income before income tax provision			2,296				4,012				5,312				7,258
Income tax provision			360				813				918				1,239
NET INCOME		$	1,936			$	3,199			$	4,394			$	6,019
PER SHARE DATA:
Net income – basic		$	0.22			$	0.38			$	0.52			$	0.72
Net income – diluted		$	0.22			$	0.38			$	0.52			$	0.72
Dividend per share		$	0.24			$	0.24			$	0.48			$	0.48
Number of shares used in computation – basic			8,698,703				8,363,821				8,497,076				8,371,810
Number of shares used in computation – diluted			8,711,732				8,386,723				8,512,559				8,402,130

The accompanying notes are an integral part of these consolidated financial statements.

CITIZENS & NORTHERN CORPORATION — FORM 10-Q

Consolidated Statement of Cash Flows

		6 Months Ended
		June 30,				June 30,
		2007				2006
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income		$	4,394			$	6,019
Adjustments to reconcile net income to net cash provided by operating activities:
Provision for loan losses			229				300
Realized losses (gains) on available for sale securities, net			11				(2,648	)
Gain on sale of foreclosed assets, net			(76	)			(52	)
Gain on sale of premises and equipment			—				(26	)
Depreciation expense			1,365				1,266
Loss from writedown of impaired premises and equipment			—				169
Accretion and amortization of securities, net			199				245
Other accretion and amortization, net			(63	)			—
Increase in cash surrender value of life insurance			(319	)			(300	)
Stock-based compensation			206				20
Amortization of core deposit intangibles			132				64
Net increase in trading securities			(2,514	)			—
Increase in accrued interest receivable and other assets			(1,708	)			(2,902	)
Increase in accrued interest payable and other liabilities			118				656
Net Cash Provided by Operating Activities			1,974				2,811
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from acquisition of Citizens Bancorp, Inc., net			29,952				—
Proceeds from maturity of held-to-maturity securities			2				3
Proceeds from sales of available-for-sale securities			39,748				68,962
Proceeds from calls and maturities of available-for-sale securities			18,831				17,469
Purchase of available-for-sale securities			(23,672	)			(26,556	)
Purchase of Federal Home Loan Bank of Pittsburgh stock			(1,846	)			(958	)
Redemption of Federal Home Loan Bank of Pittsburgh stock			2,787				2,352
Net increase in loans			(8,046	)			(6,215	)
Return of principal on limited partnership investment			238				—
Purchase of premises and equipment			(1,524	)			(2,332	)
Proceeds from sale of premises and equipment			—				222
Proceeds from sale of foreclosed assets			421				151
Net Cash Provided by Investing Activities			56,891				53,098
CASH FLOWS FROM FINANCING ACTIVITIES:
Net increase (decrease) in deposits			11,148				(591	)
Net (decrease) increase in short-term borrowings			(15,680	)			16,216
Proceeds from long-term borrowings			15,000				—
Repayments of long-term borrowings			(49,195	)			(51,316	)
Purchase of treasury stock			(593	)			(651	)
Sale of treasury stock			88				49
Tax benefit from compensation plans			—				7
Dividends paid			(3,978	)			(3,985	)
Net Cash Used in Financing Activities			(43,210	)			(40,271	)
INCREASE IN CASH AND CASH EQUIVALENTS			15,655				15,638
CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR			27,159				26,446
CASH AND CASH EQUIVALENTS, END OF PERIOD		$	42,814			$	42,084

CITIZENS & NORTHERN CORPORATION — FORM 10-Q

Consolidated Statement of Cash Flows
(In Thousands) (Unaudited) (Continued)

		6 Months Ended
		June 30,				June 30,
		2007				2006
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Assets acquired through foreclosure of real estate loans		$	189			$	559
Interest paid		$	16,695			$	14,958
Income taxes paid		$	1,112			$	1,500
ACQUISITION OF CITIZENS BANCORP, INC.:
Cash and cash equivalents received		$	44,264			$	—
Cash paid for acquisition			(14,312	)			—
Net cash received on acquisition		$	29,952			$	—
NONCASH ASSETS RECEIVED, LIABILITIES ASSUMED AND EQUITY ISSUED FROM ACQUISITION OF CITIZENS BANCORP, INC.:
Assets received:
Available for sale securities		$	26,426			$	—
Loans			60,151				—
Bank-owned life insurance			4,433				—
Premises and equipment			5,243				—
Foreclosed assets			107				—
Intangible asset — core deposit intangible			1,487				—
Intangible asset — goodwill			9,258				—
Other assets			1,567				—
Total noncash assets received		$	108,672			$	—
Liabilities assumed and equity issued:
Deposits		$	99,636			$	—
Short-term borrowings			1,426				—
Long-term borrowings			22,753				—
Other liabilities			735				—
Equity issued, net			14,074				—
Total noncash liabilities assumed and equity issued		$	138,624			$	—

The accompanying notes are an integral part of these consolidated financial statements.

CITIZENS & NORTHERN CORPORATION — FORM 10-Q

Notes to Consolidated Financial Statements

1. BASIS OF INTERIM PRESENTATION

The consolidated financial statements include the accounts of Citizens & Northern Corporation and its subsidiaries, Citizens & Northern Bank (“C&N Bank”), Canisteo Valley Corporation, Bucktail Life Insurance Company and Citizens & Northern Investment Corporation (collectively, the “Corporation”). The consolidated financial statements also include the accounts of Canisteo Valley Corporation’s wholly-owned subsidiary, First State Bank, and C&N Bank’s wholly-owned subsidiary, C&N Financial Services Corporation. All material intercompany balances and transactions have been eliminated in consolidation.

The financial information included herein, with the exception of the consolidated balance sheet dated December 31, 2006, is unaudited; however, such information reflects all adjustments (consisting solely of normal recurring adjustments) that are, in the opinion of management, necessary for a fair presentation of the financial position, results of operations and cash flows for the interim periods.

Results reported for the three-month and six-month periods ended June 30, 2007 might not be indicative of the results for the year ending December 31, 2007.

This document has not been reviewed or confirmed for accuracy or relevance by the Federal Deposit Insurance Corporation or any other regulatory agency.

2. PER SHARE DATA

Net income per share is based on the weighted-average number of shares of common stock outstanding. The number of shares used in calculating net income and cash dividends per share reflect the retroactive effect of stock dividends for all periods presented. The following data show the amounts used in computing net income per share and the weighted average number of shares of dilutive stock options. As shown in the table that follows, diluted earnings per share is computed using weighted average common shares outstanding, plus weighted-average common shares available from the exercise of all dilutive stock options, less the number of shares that could be repurchased with the proceeds of stock option exercises based on the average share price of the Corporation’s common stock during the period.

						Weighted-
						Average				Earnings
		Net				Common				Per
		Income				Shares				Share
Six Months Ended June 30, 2007
Earnings per share – basic		$	4,394,000				8,497,076			$	0.52
Dilutive effect of potential common stock arising from stock options:
Exercise of outstanding stock options							110,492
Hypothetical share repurchase at $21.29							(95,009	)
Earnings per share – diluted		$	4,394,000				8,512,559			$	0.52
Six Months Ended June 30, 2006
Earnings per share – basic		$	6,019,000				8,371,810			$	0.72
Dilutive effect of potential common stock arising from stock options:
Exercise of outstanding stock options							140,995
Hypothetical share repurchase at $24.44							(110,675	)
Earnings per share – diluted		$	6,019,000				8,402,130			$	0.72

CITIZENS & NORTHERN CORPORATION — FORM 10-Q

						Weighted-
						Average				Earnings
		Net				Common				Per
		Income				Shares				Share
Quarter Ended June 30, 2007
Earnings per share – basic		$	1,936,000				8,698,703			$	0.22
Dilutive effect of potential common stock arising from stock options:
Exercise of outstanding stock options							109,616
Hypothetical share repurchase at $20.73							(96,587	)
Earnings per share – diluted		$	1,936,000				8,711,732			$	0.22
Quarter Ended June 30, 2006
Earnings per share – basic		$	3,199,000				8,363,821			$	0.38
Dilutive effect of potential common stock arising from stock options:
Exercise of outstanding stock options							122,005
Hypothetical share repurchase at $22.70							(99,103	)
Earnings per share – diluted		$	3,199,000				8,386,723			$	0.38

3. COMPREHENSIVE INCOME

U.S. generally accepted accounting principles generally require that recognized revenue, expenses, gains and losses be included in net income. Although unrealized gains and losses on available-for-sale securities are reported as a separate component of the equity section of the balance sheet, changes in unrealized gains and losses on available-for-sale securities, along with net income, are components of comprehensive income. Also, effective December 31, 2006, the Corporation applied Statement of Financial Accounting Standards (SFAS) No. 158, Employers’ Accounting for Defined Benefit Pension and Other Postretirement Plans. SFAS No. 158 requires the Corporation to recognize the underfunded or overfunded status of defined benefit postretirement plans as a liability or asset in the balance sheet. Beginning in 2007, changes in accumulated other comprehensive income attributable to the impact of SFAS No. 158 on defined benefit plans are included in other comprehensive income.

The components of comprehensive income, and the related tax effects, are as follows:

CITIZENS & NORTHERN CORPORATION — FORM 10-Q

		3 Months Ended								6 Months Ended
		June 30,				June 30,				June 30,				June 30,
(In Thousands)		2007				2006				2007				2006
Net income		$	1,936			$	3,199			$	4,394			$	6,019
Unrealized gains (losses) on available-for-sale securities:
Unrealized holding losses on available-for-sale securities			(4,317	)			(2,342	)			(3,693	)			(4,607	)
Less: Reclassification adjustment for losses (gains) realized in income			1,172				(1,333	)			11				(2,648	)
Other comprehensive loss before income tax			(3,145	)			(3,675	)			(3,682	)			(7,255	)
Income tax related to unrealized loss on securities			1,069				1,254				1,252				2,468
Other comprehensive loss on securities			(2,076	)			(2,421	)			(2,430	)			(4,787	)
Unfunded pension and postretirement obligations:
Amortization of net transition obligation, prior service cost and net actuarial loss included in net periodic benefit cost			11				—				22				—
Income tax related to other comprehensive gain			(4	)			—				(9	)			—
Other comprehensive gain on unfunded retirement obligations			7				—				13				—
Total comprehensive (loss) income		$	(133	)		$	778			$	1,977			$	1,232

4. SECURITIES

The Corporation’s trading assets at June 30, 2007 were municipal bonds with an estimated fair value of $2,514,000. The consolidated income statement includes net losses from trading assets in the six months ended June 30, 2007 of $71,000, including a realized gain on the sale of a trading security of $6,000 in the first quarter and an unrealized holding loss of $77,000 in the second quarter. There was no trading activity in 2006.

Amortized cost and fair value of available-for-sale and held-to-maturity securities at June 30, 2007 are summarized as follows:

						Gross				Gross
						Unrealized				Unrealized
		Amortized				Holding				Holding				Fair
(In Thousands)		Cost				Gains				Losses				Value
AVAILABLE-FOR-SALE SECURITIES:
Obligations of other U.S. Government agencies		$	30,884			$	2			$	(468	)		$	30,418
Obligations of states and political subdivisions			61,519				276				(1,500	)			60,295
Mortgage-backed securities			110,060				91				(1,681	)			108,470
Collateralized mortgage obligations			36,554				—				(1,196	)			35,358
Other securities			84,193				856				(772	)			84,277
Total debt securities			323,210				1,225				(5,617	)			318,818
Marketable equity securities			22,042				4,218				(795	)			25,465
Total		$	345,252			$	5,443			$	(6,412	)		$	344,283
HELD-TO-MATURITY SECURITIES:
Obligations of the U.S. Treasury		$	309			$	3			$	—			$	312
Obligations of other U.S. Government agencies			99				4				—				103
Mortgage-backed securities			4				—				—				4
Total		$	412			$	7			$	—			$	419

CITIZENS & NORTHERN CORPORATION — FORM 10-Q

The following table presents gross unrealized losses and fair value of investments aggregated by investment category and length of time that individual securities have been in a continuous unrealized loss position at June 30, 2007.

		Less Than 12 Months								12 Months or More								Total
June 30, 2007		Fair				Unrealized				Fair				Unrealized				Fair				Unrealized
(In Thousands)		Value				Losses				Value				Losses				Value				Losses
AVAILABLE-FOR-SALE SECURITIES:
Obligations of other U.S. Government agencies		$	3,676			$	(24	)		$	24,556			$	(444	)		$	28,232			$	(468	)
Obligations of states and political subdivisions			26,293				(1,136	)			12,586				(364	)			38,879				(1,500	)
Mortgage-backed securities			20,703				(315	)			39,279				(1,366	)			59,982				(1,681	)
Collateralized mortgage obligations			5,464				(41	)			29,894				(1,155	)			35,358				(1,196	)
Other securities			25,239				(240	)			29,017				(532	)			54,256				(772	)
Total debt securities			81,375				(1,756	)			135,332				(3,861	)			216,707				(5,617	)
Marketable equity securities			6,898				(515	)			2,047				(280	)			8,945				(795	)
Total temporarily impaired available-for-sale securities		$	88,273			$	(2,271	)		$	137,379			$	(4,141	)		$	225,652			$	(6,412	)

Management evaluates securities for other-than-temporary impairment at least on a quarterly basis, and more frequently when economic or market concerns warrant such evaluation. Consideration is given to (1) the length of time and the extent to which the fair value has been less than cost, (2) the financial condition and near-term prospects of the issuer, and (3) the intent and ability of the Corporation to retain its investment in the issuer for a period of time sufficient to allow for any anticipated recovery in fair value.

In the second quarter 2007, management determined that adjustable rate mortgage-backed securities with a face value totaling $44,509,000 were other-than-temporarily impaired. The Corporation sold the securities in July 2007, and recorded a loss of $1,780,000 (pre-tax) in the second quarter 2007. As a result of changes in market conditions, the loss from sale in July exceeded the amount of loss recorded in the first six months of 2007 by $265,000. The additional loss will be recorded in the third quarter 2007. Management made the decision to sell the securities based on an analysis of substantially all of the debt securities with unrealized losses. For the securities which management decided to sell, the average yield in the second quarter 2007 was 4.41%. Proceeds from the sales were used to purchase a combination of mortgage-backed securities and other securities for a yield of approximately 6%. At current interest rates, management expects the total increase in earnings from the new securities to equal the amount of up-front loss on the sale in approximately three years, while the average remaining life of the sold securities is estimated to be at least four years. For the remaining debt securities in an unrealized loss position, management determined that it was unlikely the increase in earnings from reinvestment at higher rates would exceed the amount of loss from sale over a time frame less than the average lives of the securities; accordingly, management intends to hold substantially all of the remaining securities until market recovery or maturity.

The unrealized losses on other debt securities are primarily the result of volatility in interest rates. Based on the credit worthiness of the issuers, which are almost exclusively U.S. Government agencies or state and political subdivisions, and the economic analysis referred to above, management believes the Corporation’s other debt securities at June 30, 2007 were not other-than-temporarily impaired.

5. DEFINED BENEFIT PLANS

The Corporation has a noncontributory defined benefit pension plan for all employees meeting certain age and length of service requirements. Benefits are based primarily on years of service and the average annual compensation during the highest five consecutive years.

CITIZENS & NORTHERN CORPORATION — FORM 10-Q

In addition, the Corporation sponsors a defined benefit health care plan that provides postretirement medical benefits and life insurance to employees who meet certain age and length of service requirements. This plan contains a cost-sharing feature, which causes participants to pay for all future increases in costs related to benefit coverage. Accordingly, actuarial assumptions related to health care cost trend rates do not affect the liability balance at June 30, 2007 and December 31, 2006, and will not affect the Corporation’s future expenses.

The Corporation uses a December 31 measurement date for its plans.

The components of net periodic benefit costs from these defined benefit plans are as follows:

		Pension								Postretirement
		Six Months Ended								Six Months Ended
		June 30,								June 30,
(In Thousands)		2007				2006				2007				2006
Service cost		$	342			$	305			$	37			$	32
Interest cost			350				315				35				31
Expected return on plan assets			(459	)			(416	)			—				—
Amortization of transition (asset) obligation			(12	)			(12	)			18				18
Amortization of prior service cost			4				4				—				—
Recognized net actuarial loss			23				35				1				1
Net periodic benefit cost		$	248			$	231			$	91			$	82

		Pension								Postretirement
		Three Months Ended								Three Months Ended
		June 30,								June 30,
(In Thousands)		2007				2006				2007				2006
Service cost		$	171			$	153			$	19			$	16
Interest cost			175				158				18				16
Expected return on plan assets			(229	)			(208	)			—				—
Amortization of transition (asset) obligation			(6	)			(6	)			9				9
Amortization of prior service cost			2				2				—				—
Recognized net actuarial loss			12				17				—				—
Net periodic benefit cost (benefit)		$	125			$	116			$	46			$	41

For the defined benefit pension plan, the Corporation has a minimum required employer contribution of $156,000 for the year ended December 31, 2007. The Corporation has not yet made its defined benefit pension plan contribution for 2007. Through the second quarter of 2007, the Corporation has funded postretirement contributions totaling $29,000, with estimated annual postretirement contributions, net of anticipated reimbursements from the Medicare (Part D) program, of $33,000 expected in 2007 for the full year.

6. STOCK-BASED COMPENSATION PLANS

In January 2007, the Corporation granted options to purchase a total of 43,385 shares of common stock through its Stock Incentive and Independent Directors Stock Incentive Plans. The exercise price for these options is $22.325 per share, which was the market price as of the date of grant. The Corporation neither modified, nor issued, any new options in 2006.

SFAS No. 123R requires the Corporation to record stock option expense based on estimated fair value calculated using an option valuation model. The fair value of each option granted in 2007 was estimated to be $4.46 per share as of the grant date. In calculating the fair value, the Corporation utilized the Black-Scholes option-pricing model with the following assumptions:

CITIZENS & NORTHERN CORPORATION — FORM 10-Q

	•		Volatility – 23%
	•		Expected option lives – 8 years
	•		Risk-free interest rate – 4.69%
	•		Dividend yield – 3.61%

In calculating the estimated fair value of the 2007 stock option awards, the Corporation utilized its historical volatility and dividend yield over the immediately prior 8-year period to estimate future levels of volatility and dividend yield. The risk-free interest rate was based on the published yield of zero-coupon U.S. Treasury strips with an 8-year maturity as of the grant dates. The 8-year term was based on management’s estimate of the average term for all options issued under both plans.

In calculating stock option expense for the 2007 stock option awards, management assumed a 23% forfeiture rate for options granted under the Stock Incentive Plan, and a 0% forfeiture rate for the Directors Stock Incentive Plan. These estimated forfeiture rates were determined based on the Corporation’s historical experience.

Also, effective in January 2007, the Corporation awarded a total of 5,835 shares of restricted stock under the Stock Incentive and Independent Directors Stock Incentive Plans. Compensation cost related to restricted stock is recognized based on the market price of the stock at the grant date over the vesting period.

Total stock-based compensation expense is as follows:

		3 Months Ended								Fiscal Year To Date
		June 30,				June 30,				6 Months Ended June 30,
		2007				2006				2007				2006
(In Thousands)		(Current)				(Prior Year)				(Current)				(Prior Year)
Stock options		$	77			$	—			$	156			$	—
Restricted stock			26				10				50				20
Total		$	103			$	10			$	206			$	20

Stock option expense has been recognized over the six-month vesting period for the 2007 awards. Management expects there will be no stock option expense in the last six months of 2007.

7. CONTINGENCIES

In the normal course of business, the Corporation may be subject to pending and threatened lawsuits in which claims for monetary damages could be asserted. In management’s opinion, the Corporation’s financial position and results of operations would not be materially affected by the outcome of such pending legal proceedings.

8. MERGER

On May 1, 2007, the Corporation completed its acquisition of 100% of the outstanding voting stock of Citizens Bancorp, Inc. (“Citizens.”) Accordingly, the results of operations for the former Citizens have been included in the accompanying consolidated financial statements from that date forward. In connection with the transaction, Citizens Trust Company, the banking subsidiary of Citizens, has merged with and into Citizens & Northern Bank (“C&N Bank”), a subsidiary of the Corporation. The Corporation’s management believes the acquisition of Citizens provides two significant benefits: (1) extension of its geographic market for banking services, which should provide growth opportunities, and (2) addition of management personnel with background and skills complementary to the Corporation’s management personnel.

The aggregate acquisition price was $28,386,000, which included cash of $14,312,000 and 636,967 shares of the Corporation’s common stock valued at $14,074,000. The value of the stock issued was determined based on the average market price of the shares over the seven days before and after the date the terms of the acquisition agreement were negotiated and publicly announced, adjusted for the values of Citizens shares held prior to the merger announcement and Corporation shares that were held by Citizens.

CITIZENS & NORTHERN CORPORATION — FORM 10-Q

The Corporation is in the process of obtaining final valuations on loans, intangible assets, premises and equipment, deposits and other liabilities; accordingly, allocation of the purchase price is subject to modification in the future. Information regarding the purchase price and estimated fair values of assets acquired and liabilities assumed as of the acquisition date is provided as supplemental information in the consolidated statement of cash flows. Following are pro forma income statement amounts, without adjustment for the material nonrecurring items described below, assuming the acquisition was made on January 1, 2006:

		3 Months Ended								Fiscal Year To Date
		June 30,				June 30,				6 Months Ended June 30,
		2007				2006				2007				2006
(In Thousands)		(Current)				(Prior Year)				(Current)				(Prior Year)
Net interest income		$	18,033			$	16,977			$	35,296			$	33,787
Net income		$	1,186			$	3,520			$	3,942			$	6,606
Net income per share — basic		$	0.13			$	0.39			$	0.44			$	0.73
Net income per share — diluted		$	0.13			$	0.39			$	0.44			$	0.73

Citizens recorded material, nonrecurring expenses and losses which reduced pro forma net income (included in the table immediately above) by $787,000 for the three months ended June 30, 2007 and $764,000 for the six months ended June 30, 2007. These nonrecurring items included merger-related professional expense, acceleration of Pennsylvania Bank Shares Tax expense (recognition of the remaining 9 months’ expense in the month of April 2007) and realized losses from sales of securities. Excluding the effect of these nonrecurring items, pro forma income statement amounts (assuming the acquisition was made on January 1, 2006) are as follows:

		3 Months Ended								Fiscal Year To Date
		June 30,				June 30,				6 Months Ended June 30,
		2007				2006				2007				2006
(In Thousands)		(Current)				(Prior Year)				(Current)				(Prior Year)
Net income		$	1,973			$	3,520			$	4,706			$	6,606
Net income per share — basic		$	0.22			$	0.39			$	0.53			$	0.73
Net income per share — diluted		$	0.22			$	0.39			$	0.53			$	0.73

CITIZENS & NORTHERN CORPORATION — FORM 10-Q

ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Certain statements in this section and elsewhere in this quarterly report on Form 10-Q are forward-looking statements. Citizens & Northern Corporation and its wholly-owned subsidiaries intend such forward-looking statements to be covered by the safe harbor provisions for forward-looking statements contained in the Private Securities Reform Act of 1995. Forward-looking statements, which are not historical facts, are based on certain assumptions and describe future plans, business objectives and expectations, and are generally identifiable by the use of words such as, “should”, “likely”, “expect”, “plan”, “anticipate”, “target”, “forecast”, and “goal”. These forward-looking statements are subject to risks and uncertainties that are difficult to predict, may be beyond management’s control and could cause results to differ materially from those expressed or implied by such forward-looking statements. Factors which could have a material, adverse impact on the operations and future prospects of the Corporation include, but are not limited to, the following:

•		changes in monetary and fiscal policies of the Federal Reserve Board and the U. S. Government, particularly related to changes in interest rates
•		changes in general economic conditions
•		legislative or regulatory changes
•		downturn in demand for loan, deposit and other financial services in the Corporation’s market area
•		increased competition from other banks and non-bank providers of financial services
•		technological changes and increased technology-related costs
•		changes in accounting principles, or the application of generally accepted accounting principles.

These risks and uncertainties should be considered in evaluating forward-looking statements and undue reliance should not be placed on such statements.

REFERENCES TO 2007 AND 2006

Unless otherwise noted, all references to “2007” in the following discussion of operating results are intended to mean the six months ended June 30, 2007, and similarly, references to “2006” relate to the six months ended June 30, 2006.

EARNINGS OVERVIEW

Net income totaled $4,394,000 in the first six months of 2007, down 27% from the first six months of 2006. Net income per share was $0.52 (basic and diluted) in the first six months of 2007, down 28% from the first six months of 2006. Return on average assets was 0.76% in the first six months of 2007, as compared to 1.05% in the first six months of 2006. Return on average equity was 6.53% in the six months ended June 30, 2007, as compared to 9.17% in the six months ended June 30, 2006.

Earnings results for the first six months of 2007 were impacted by a loss (net of tax) on impaired securities of $1,175,000. The loss from impaired securities reduced net income per share by $0.14 (basic) and $0.13 (diluted) for the first six months of 2007. The securities classified as impaired were adjustable rate mortgage-backed securities with a face value totaling $44,509,000, and were sold in July 2007. As a result of changes in market conditions, the loss from sale in July exceeded the amount of loss recorded in the first six months of 2007 by $177,000, net of tax. The additional loss will be recorded in the third quarter 2007. For the securities which management decided to sell, the average yield in the second quarter 2007 was 4.41%. Proceeds from the sales were used to purchase a combination of mortgage-backed securities and other securities for a yield of approximately 6%. At current interest rates, management expects the total increase in earnings from the new securities to equal the amount of up-front loss on the sale in approximately three years, while the average remaining life of the sold securities is estimated to be at least four years.

CITIZENS & NORTHERN CORPORATION — FORM 10-Q

On May 1, 2007, the acquisition of Citizens Bancorp, Inc. became effective. Citizens Bancorp, Inc. was the parent company of Citizens Trust Company, with offices in Coudersport, Port Allegany and Emporium, PA. The Citizens Trust Company operations, which are now part of Citizens & Northern Bank, contributed significantly to growth in total assets, including loans, as well to growth in deposits and trust assets under management and increases in revenues and expenses in the second quarter 2007.

Significant income statement changes between 2007 and 2006 were as follows:

	•		The Corporation had net (pre-tax) realized losses from sales of available-for-sale securities of $11,000 in 2007, as compared to net realized gains of $2,648,000 in 2006. Excluding the $1,780,000 (pre-tax) loss on impaired securities described above, net securities gains for the six months ended June 30, 2007 totaled $1,769,000, down $879,000 from the first six months of 2006. Most of the gains realized in both periods were from sales of bank stocks.
	•		The net interest margin increased $253,000, or 1.5%, in 2007 as compared to 2006. As discussed in the Net Interest Margin section of Management’s Discussion and Analysis, on a fully taxable equivalent basis, the net interest margin fell $158,000 in 2007 as compared to 2006. The acquisition of Citizens Trust Company resulted in increased interest and fees on loans, and provided funding the Corporation used to pay off borrowings. Overall, the Corporation has been hampered by the flat or inverted yield curve throughout 2006 and 2007, which has limited opportunities to earn a positive spread from maintaining borrowed funds and holding investment securities. Accordingly, the Corporation has sold securities and repaid borrowings throughout much of 2007 and 2006.
	•		Noninterest revenue increased $1,006,000, or 27.0%, in 2007 over 2006. Trust and Financial Management revenue increased $563,000 (53.2%), including an increase of 40.0% excluding Citizens Trust Company, and a contribution to revenue from Citizens Trust Company of $140,000. Other significant increases in noninterest revenue included: service charges on deposits, which increased $152,000 (including $101,000 from Citizens Trust Company), and increases in fees for letter of credit, credit card (as a third party agent) and debit card services totaling $204,000.
	•		Noninterest expense increased $617,000 (3.9%) in 2007 over 2006. Excluding the addition of Citizens Trust Company, total noninterest expense would have been approximately the same in 2007 as in 2006. Changes in components of noninterest expense are discussed later in Management’s Discussion and Analysis.
	•		The income tax provision decreased to $918,000 in 2007 from $1,239,000 in 2006, as a result of lower pre-tax earnings.

Second Quarter 2007

Second quarter 2007 results were impacted by the securities impairment loss described above. Net income in the second quarter 2007 was $1,936,000, down $1,263,000 (39.5%) from second quarter 2006 and down $522,000 (21.2%) from the first quarter 2007. Net income per share (basic and diluted) was $0.22 in the second quarter 2007, as compared to $0.38 (basic and diluted) in the second quarter 2006, and $0.30 per share (basic and diluted) in the first quarter 2007. Excluding the securities impairment loss, net income per share (basic and diluted) would have been $0.36 per share in the second quarter 2007.

CITIZENS & NORTHERN CORPORATION — FORM 10-Q

TABLE I — QUARTERLY FINANCIAL DATA
(In Thousands)

		June 30,				Mar. 31,				Dec. 31,				Sept. 30,				June 30,				Mar. 31,
		2007				2007				2006				2006				2006				2006
Interest income		$	17,692			$	16,243			$	16,463			$	16,152			$	15,984			$	15,863
Interest expense			8,679				8,000				8,097				7,833				7,566				7,278
Interest margin			9,013				8,243				8,366				8,319				8,418				8,585
Provision for loan losses			—				229				181				191				(300	)			600
Interest margin after provision for loan losses			9,013				8,014				8,185				8,128				8,718				7,985
Other income			2,644				2,088				2,045				2,199				1,937				1,789
Net (losses) gains on available-for-sale securities			(1,172	)			1,161				796				1,602				1,333				1,315
Gain from sale of credit card loans			—				—				340				—				—				—
Other expenses			8,189				8,247				8,155				7,640				7,976				7,843
Income before income tax provision			2,296				3,016				3,211				4,289				4,012				3,246
Income tax provision			360				558				517				1,016				813				426
Net income		$	1,936			$	2,458			$	2,694			$	3,273			$	3,199			$	2,820
Net income per share – basic		$	0.22			$	0.30			$	0.32			$	0.39			$	0.38			$	0.34
Net income per share – diluted		$	0.22			$	0.30			$	0.32			$	0.39			$	0.38			$	0.33

The number of shares used in calculating net income per share for each quarter presented in Table I reflects the retroactive effect of stock dividends.

Prospects for the Remainder of 2007

The flat or inverted yield curve, which has been in existence for approximately 2 ¹/2 years, continues to challenge the Corporation’s ability to achieve earnings growth, and it is apparent that changes are necessary to improve profitability. Management expects the securities portfolio restructuring referred to in the Earnings Overview section of Management’s Discussion and Analysis to increase interest income approximately $290,000 over the remainder of 2007. Also, management has begun several initiatives designed to increase revenues and reduce expenses over the remainder of 2007 and 2008. Management expects some of the initiatives to immediately increase revenues or decrease expenses, while other changes may result in an up front cost or expense, followed by future improvements. Looking beyond the end of 2007, management expects that expansion of the Corporation’s footprint – including in 2005 through 2007 the construction or acquisition of banking facilities in Lycoming County, PA, New York State (First State Bank) and most recently, the Citizens Trust Company locations – will produce opportunities to increase profitability by increasing loans, deposits and Trust and Financial Management volume. While management expects these activities to result in positive contributions to earnings in the future, the net impact for the year ending December 31, 2007 cannot be determined.

Another major variable that affects the Corporation’s earnings is securities gains and losses, particularly from bank stocks and other equity securities. Management’s decisions regarding sales of securities are based on a variety of factors, with the overall goal of maximizing portfolio return over a long-term horizon. It is difficult to predict, with much precision, the amount of net securities gains and losses that will be realized throughout the remainder of 2007.

CRITICAL ACCOUNTING POLICIES

The presentation of financial statements in conformity with U.S. generally accepted accounting principles requires management to make estimates and assumptions that affect many of the reported amounts and disclosures. Actual results could differ from these estimates.

CITIZENS & NORTHERN CORPORATION — FORM 10-Q

A material estimate that is particularly susceptible to significant change is the determination of the allowance for loan losses. Management believes that the allowance for loan losses is adequate and reasonable. The Corporation’s methodology for determining the allowance for loan losses is described in a separate section later in Management’s Discussion and Analysis. Given the very subjective nature of identifying and valuing loan losses, it is likely that well-informed individuals could make materially different assumptions, and could, therefore, calculate a materially different allowance value. While management uses available information to recognize losses on loans, changes in economic conditions may necessitate revisions in future years. In addition, various regulatory agencies, as an integral part of their examination process, periodically review the Corporation’s allowance for loan losses. Such agencies may require the Corporation to recognize adjustments to the allowance based on their judgments of information available to them at the time of their examination.

Another material estimate is the calculation of fair values of the Corporation’s debt securities. The Corporation receives estimated fair values of debt securities from an independent valuation service, or from brokers. In developing these fair values, the valuation service and the brokers use estimates of cash flows, based on historical performance of similar instruments in similar interest rate environments. Based on experience, management is aware that estimated fair values of debt securities tend to vary among brokers and other valuation services. Accordingly, when selling debt securities, management typically obtains price quotes from more than one source. The large majority of the Corporation’s securities are classified as available-for-sale. Accordingly, these securities are carried at fair value on the consolidated balance sheet, with unrealized gains and losses excluded from earnings and reported separately through accumulated other comprehensive income (included in stockholders’ equity).

NET INTEREST MARGIN

The Corporation’s primary source of operating income is represented by the net interest margin. The net interest margin is equal to the difference between the amounts of interest income and interest expense. Tables II, III and IV include information regarding the Corporation’s net interest margin for 2007 and 2006. In each of these tables, the amounts of interest income earned on tax-exempt securities and loans have been adjusted to a fully taxable-equivalent basis. Accordingly, the net interest margin amounts reflected in these tables exceed the amounts presented in the consolidated financial statements. The discussion that follows is based on amounts in the related Tables.

The fully taxable equivalent net interest margin was $18,221,000 in 2007, $158,000 (0.9%) lower than in 2006. As shown in Table IV, net increases in volume had the effect of increasing net interest income $411,000 in 2007 over 2006 while interest rate changes had the effect of decreasing net interest income $569,000. Increases in volume of earning assets and interest-bearing liabilities were significantly affected by the acquisition of Citizens Trust Company on May 1, 2007. The most significant components of the volume changes in 2007 were an increase of $2,046,000 attributable to loan growth and a decrease in interest expense on short-term and long-term borrowings of $706,000, partially offset by lower interest income of $1,818,000 from available-for-sale securities and an increase in interest expense of $496,000 on certificates of deposit. As presented in Table III, the “Interest Rate Spread” (excess of average rate of return on interest-bearing assets over average cost of funds on interest-bearing liabilities) was 2.83% in the first six months of 2007, as compared to 2.90% for the year ended December 31, 2006 and 2.98% in the first six months of 2006.

INTEREST INCOME AND EARNING ASSETS

Interest income totaled $34,900,000 in 2007, an increase of 5.0% over 2006. Interest and fees from loans increased $3,179,000, or 14.6%, while income from available-for-sale securities decreased $1,607,000, or 14.2%. As indicated in Table III, total average available-for-sale securities in 2007 fell to $348,162,000, a decrease of $58,752,000 or 14.4% from 2006. Throughout the calendar year 2006 and the first half of 2007, proceeds from sales and maturities of securities were used, in part, to help fund loans and pay off borrowings. Within the available-for-sale securities portfolio, the average balance of municipal bonds shrunk by $43,573,000 in 2007 as compared to 2006. Management decided to reduce the Corporation’s investment in municipal bonds in order to reduce the alternative minimum tax liability. The average rate of return on available-for-sale securities was 5.60% for 2007, in line with the 5.55% return for the year ended December 31, 2006 and 5.59% in the first half of 2006.

CITIZENS & NORTHERN CORPORATION — FORM 10-Q

The average balance of gross loans increased 9.1% to $712,858,000 in 2007 from $653,577,000 in the first half of 2006. Excluding Citizens Trust Company, average loans increased 5.9%. The Corporation has experienced an increase in average balances of both residential mortgage and commercial loans in 2007. The average rate of return on loans was 7.07% in 2007, up from 6.81% for the year ended December 31, 2006 and 6.73% in the first half of 2006.

INTEREST EXPENSE AND INTEREST-BEARING LIABILITIES

Interest expense rose $1,835,000, or 12.4%, to $16,679,000 in 2007 from $14,844,000 in 2006. Table III shows that the overall cost of funds on interest-bearing liabilities rose to 3.74% in 2007, from 3.44% for the year ended December 31, 2006 and 3.30% in the first half of 2006.

From Table III, you can calculate that total average deposits (interest-bearing and noninterest-bearing) increased 5.4%, to $792,390,000 in 2007 from $752,127,000 in the first half of 2006. Excluding Citizens Trust Company, total average deposits increased only slightly (0.7%). The average rate incurred on certificates of deposit has increased significantly in 2007 over the first half of 2006, to 4.46% from 3.75%. Also, the average rate on Individual Retirement Accounts increased significantly, to 4.59% in 2007 from 3.98% in the first half of 2006.

The combined average total short-term and long-term borrowed funds decreased $38,926,000 to $216,299,000 in 2007 from $255,225,000 in the first half of 2006. With the yield curve being flat or inverted throughout 2006 and 2007, opportunities have been limited for earning a positive spread by purchasing or holding investment securities as compared to interest costs associated with maintaining borrowed funds. Accordingly, the Corporation has been paying off many borrowings as they mature. The average rate on long-term borrowings was 4.06% in 2007, up from 3.50% in the first half of 2006.

CITIZENS & NORTHERN CORPORATION — FORM 10-Q

TABLE II — ANALYSIS OF INTEREST INCOME AND EXPENSE

		Six Months Ended
		June 30,								Increase/
(In Thousands)		2007				2006				(Decrease)
INTEREST INCOME
Available-for-sale securities:
Taxable		$	7,606			$	7,815			$	(209	)
Tax-exempt			2,069				3,467				(1,398	)
Total available-for-sale securities			9,675				11,282				(1,607	)
Held-to-maturity securities,
Taxable			12				12				—
Trading securities			28				—				28
Interest-bearing due from banks			58				35				23
Federal funds sold			150				96				54
Loans:
Taxable			23,960				20,861				3,099
Tax-exempt			1,017				937				80
Total loans			24,977				21,798				3,179
Total Interest Income			34,900				33,223				1,677
INTEREST EXPENSE
Interest checking			1,025				936				89
Money market			3,003				2,828				175
Savings			167				172				(5	)
Certificates of deposit			5,245				3,952				1,293
Individual Retirement Accounts			2,900				2,416				484
Other time deposits			3				3				—
Short-term borrowings			965				1,049				(84	)
Long-term borrowings			3,371				3,488				(117	)
Total Interest Expense			16,679				14,844				1,835
Net Interest Income		$	18,221			$	18,379			$	(158	)

Note: Interest income from tax-exempt securities and loans has been adjusted to a fully tax-equivalent basis, using the Corporation’s marginal federal income tax rate of 34%.

CITIZENS & NORTHERN CORPORATION — FORM 10-Q

		6 Months								Year								6 Months
		Ended				Rate of				Ended				Rate of				Ended				Rate of
		6/30/2007				Return/				12/31/2006				Return/				6/30/2006				Return/
		Average				Cost of				Average				Cost of				Average				Cost of
(Dollars in Thousands)		Balance				Funds %				Balance				Funds %				Balance				Funds %
EARNING ASSETS
Available-for-sale securities, at amortized cost:
Taxable		$	284,469				5.39	%		$	295,138				5.25	%		$	299,648				5.26	%
Tax-exempt			63,693				6.55	%			89,981				6.51	%			107,266				6.52	%
Total available-for-sale securities			348,162				5.60	%			385,119				5.55	%			406,914				5.59	%
Held-to-maturity securities,
Taxable			413				5.86	%			418				5.74	%			420				5.76	%
Trading securities			943				5.99	%			—				0.00	%			—				0.00	%
Interest-bearing due from banks			2,481				4.71	%			2,272				4.01	%			1,973				3.58	%
Federal funds sold			6,223				4.86	%			4,580				5.48	%			3,388				5.71	%
Loans:
Taxable			680,346				7.10	%			631,969				6.84	%			622,647				6.76	%
Tax-exempt			32,512				6.31	%			30,745				6.19	%			30,930				6.11	%
Total loans			712,858				7.07	%			662,714				6.81	%			653,577				6.73	%
Total Earning Assets			1,071,080				6.57	%			1,055,103				6.34	%			1,066,272				6.28	%
Cash			18,777								19,027								19,351
Unrealized gain/loss on securities			2,046								3,151								4,757
Allowance for loan losses			(8,539	)							(8,495	)							(8,792	)
Bank premises and equipment			25,237								23,491								23,519
Intangible Asset — Core Deposit Intangible			1,036								389								410
Intangible Asset — Goodwill			5,645								2,912								2,919
Other assets			38,771								39,111								38,036
Total Assets		$	1,154,053							$	1,134,689							$	1,146,472
INTEREST-BEARING LIABILITIES
Interest checking		$	73,868				2.80	%		$	68,369				2.61	%		$	72,519				2.60	%
Money market			182,909				3.31	%			179,288				3.24	%			179,277				3.18	%
Savings			61,387				0.55	%			62,030				0.54	%			63,701				0.54	%
Certificates of deposit			237,390				4.46	%			215,460				3.96	%			212,494				3.75	%
Individual Retirement Accounts			127,286				4.59	%			122,459				4.28	%			122,544				3.98	%
Other time deposits			1,172				0.52	%			1,116				0.63	%			1,065				0.57	%
Short-term borrowings			48,724				3.97	%			56,606				4.09	%			54,004				3.92	%
Long-term borrowings			167,575				4.06	%			188,077				3.59	%			201,221				3.50	%
Total Interest-bearing Liabilities			900,311				3.74	%			893,405				3.44	%			906,825				3.30	%
Demand deposits			108,378								102,260								100,527
Other liabilities			10,053								7,942								7,915
Total Liabilities			1,018,742								1,003,607								1,015,267
Stockholders’ equity, excluding other comprehensive income/loss			135,126								129,004								128,088
Other comprehensive income/loss			185								2,078								3,117
Total Stockholders’ Equity			135,311								131,082								131,205
Total Liabilities and Stockholders’ Equity		$	1,154,053							$	1,134,689							$	1,146,472
Interest Rate Spread							2.83	%							2.90	%							2.98	%
Net Interest Income/Earning Assets							3.43	%							3.42	%							3.48	%

(1)		Rates of return on tax-exempt securities and loans are presented on a fully taxable-equivalent basis.
(2)		Nonaccrual loans have been included with loans for the purpose of analyzing net interest earnings.

CITIZENS & NORTHERN CORPORATION — FORM 10-Q

TABLE IV — ANALYSIS OF VOLUME AND RATE CHANGES
(In Thousands)

		YTD Ended 6/30/07 vs. 6/30/06
		Change in				Change in				Total
		Volume				Rate				Change
EARNING ASSETS
Available-for-sale securities:
Taxable		$	(403	)		$	194			$	(209	)
Tax-exempt			(1,415	)			17				(1,398	)
Total available-for-sale securities			(1,818	)			211				(1,607	)
Held-to-maturity securities,
Taxable			—				—				—
Trading securities			28				—				28
Interest-bearing due from banks			10				13				23
Federal funds sold			70				(16	)			54
Loans:
Taxable			1,997				1,102				3,099
Tax-exempt			49				31				80
Total loans			2,046				1,133				3,179
Total Interest Income			336				1,341				1,677
INTEREST-BEARING LIABILITIES
Interest checking			17				72				89
Money market			58				117				175
Savings			(6	)			1				(5	)
Certificates of deposit			496				797				1,293
Individual Retirement Accounts			96				388				484
Other time deposits			—				—				—
Short-term borrowings			(105	)			21				(84	)
Long-term borrowings			(631	)			514				(117	)
Total Interest Expense			(75	)			1,910				1,835
Net Interest Income		$	411			$	(569	)		$	(158	)